Thursday, June 30, 2016

Trump is wrong about trade because he sees it through the eyes of a businessman, not an economist. A successful businessman knows that he must always work to maximize his profits, and he can do that only if the goods and services he provides bring in more money than he spends in their production. Trump incorrectly compares a business to an economy when he suggests we "win" if we export more than we import. That's what mercantilism was all about: maximizing net exports. But whereas maximizing net sales is best for a business, it's not best for an economy.

As Don Boudreaux points out, an economy is not a business. "The ultimate goal of economic activity is consumption," whereas the ultimate goal of a business is to generate profits.

As a businessman, Donald Trump understands what ails the economy: taxes are too high, and regulations are too abundant. He's absolutely right when he says that "we tax and regulate and restrict our companies to death." If he becomes president and cuts and simplifies taxes and reduces regulatory burdens, then the economy will surely boom. But if he raises tariffs on "cheap" imports he will only succeed in impoverishing us all. Buying cheap things from other countries allows us to spend more on other things that enrich our lives.

Trump is wrong when he complains that we allow other countries to export to us tax-free, and that as a result "we have become more dependent on other countries than ever before." Trade allows people to specialize in what they do best. Every person and every business in the world is totally dependent on other people and other businesses; no single person or business can produce more than a tiny fraction of what is needed to survive in today's complex and dynamic world. There's nothing wrong with being dependent on other people, other businesses, and other countries. Being dependent on others is a basic fact of life in the modern world. It's not something to reject, it's something to celebrate, for otherwise we could not enjoy the highest standard of living in the history of mankind. Maximizing net exports would weaken, not strengthen our economy.

Trump is arguably a smart and successful businessman, but that doesn't mean he understands how an economy works.

Anyone who thinks it's impressive to say they have "the best words," probably isn't particularly bright.

He was smart enough to pick a rich father who was in a business that happened to boom at an early point in his son's career, thereby lending him the appearance of business acumen, which he has now almost completely destroyed.

There may be, however, costs to a nation that is a net debtor to the tune of hundreds of billions of dollars, year after year.

Little noticed is that many major banks in Australia will no longer extend property loans to foreigners. The Australians believe the best property in the country is being acquired by foreigners, and of course Australia has run chronic trade deficits for decades.

Ultimately, chronic trade deficits are financed by selling assets.

If one is a globalist, there is nothing wrong in this outcome.

Aussies who are being priced out of property and farmland have a different point of view.

When Detroit exported cars it was rich---in fact Detroit was the richest city on the planet in 1960. Detroit stopped exporting so many cars. Living standards have plummeted since.

There are theories and then there are facts on the ground. Life is complicated.

Well it looks like it will be President Clinton. The US prospered mightily under her husband. I hope for such good times again.

Pondering trade regimes is tough. I tend to agree with Scott on free trade. However, I am also concerned that the US has massive trade deficits coupled with massive deficit spending by the government. The only way to make that work is to "give away" more of our best firms. It's no accident that Apple is now essentially a foreign firm. Likewise, all of the our major oil companies are now essentially overseas companies. The unwillingness of establishment Republicans and Democrats to see the long-term benefits of having balanced trade and a balanced government budget astonishes me.

Here's my economics question for Scott:

All things being equal, would the US be better off with a balanced trade account and balanced government budget?

PS: I believe that the prospects for regulatory and tax reform in Washington DC are hopeless. Conversely, amending the Constitution would give me hope. At a minimum, the US needs to convene a Constitutional Convention of states to: a) repeal the 19th amendment allowing for direct election of Senators vice selection by state legislators); b) ratify a balanced budget amendment; c) ratify an amendment specifying term limits for all classes for elected officials; and d) ratify an amendment that makes it impossible for the US to send troops overseas without a Congressional declaration of war. Amendments to the Constitution may be the only way to prevent harmful trade regulations that will lead to a global trade war that the opponents of globalization are so eager to begin.

China steals our IP, doesn't give us the freedom in their market we give it in ours, and our leaders do nothing - even though they need us more than we need them. We do need leaders that will stand up for us on trade issues and that is all Trump is saying we do.

JMHO: with negative interest rates in Euroland and Japan and an extremely flat sovereign yield curve in the USA damaging the profitability and perhaps survival of major banks, maybe it's time for Central Banks to sell longer dated bonds to meet the extreme demand and to raise their sovereign yield curves. Otherwise.......no one knows!!

Scott, I agree with you 100% that Trump is wrong on trade but you're being generous with why. Rather, I think he know's what taps into the angry and somewhat forgotten majority white guy. He can't possibly to that dumb about trade. It's all for show and he can'r possibly WANT to win. This will be the first time in 40 years I don't vote for the GOP candidate for president. Of course, neither can I vote for Hillary so...

Steve, I agree with you Trump doesn't really want to be President of the United Sates. He and his children know that he would hate the tremendous responsibility and constant conflict with the Republican congressional leadership. I have thought for a long time that Trump got into the race for Republican nominee just to show the East Coast nobility that he was smarter and better than they were; to destroy the Bush white-shoe dynasty who had looked down upon him as nouveau riche; and to one-up politicians of both Parties for whom he has ZERO respect.

If anyone's goal was to destroy the foundations of the Republican Party, no one could do a better job than Donald Trump has done. All he needs now is an excuse to drop out. I don't think that his ego could survive defeat by Hillary Clinton.

@William, the grand old party of the GOP is irreversibly dead. If not Trump, then someone else like Trump would have emerged. The GOP soul be wise to acknowledge the failure if their establishment platform un order to build a modernized brand of conservatism that has a chance of being relevant in the 21st century. The future if the GOO can still be along the lines if fiscal conservatism, but the social politics if the GOP must change or risk the demise of even fiscal conservatism. There's no going back to the good old days of past Republicanism -- far from it. To think otherwise in today's political climate would be naive.

What is left out of this analysis, I believe, is that Trump is a negotiator. And negotiators understand the importance of the bluff and controlling the conversation. Trump will bluff and others will blink. And in the end, we will have lower taxes, reduction in regulations and a bit fairer trade. Voting for Hillary or a third part is slitting your own throat and means a perpetuation of bad policy ad infinitum.

Trump does not care if he is "right" or not, he is a master persuader, he is talking to influence. That's his only goal and he will say anything (as long as it is constructed in a certain persuasive manner). The people who listen and would vote for him hardly care about the real facts either, they follow for various reasons which I noted before.

" And negotiators understand the importance of the bluff and controlling the conversation" I have heard this argument re Trump ad nauseum and it rings false. So you're going to vote for Trump based on the idea that his CENTRAL policy is just a bluff for negotiation? And have you asked yourself a negotiation for what? Higher priced goods coming from China? Doesn't anyone realize that cheap goods from overseas equals a pay raise for those who buy them and that higher priced goods hurts those who can afford it the least.

Steve, it gets even better... There was a time when the yuan would have soared if China let it float. But that certainly isn't the case now. China has spent hundreds of billions propping it up all the while letting the air out slowly.

So, technically, Trump is right in that China is a currency manipulator. It's just not in the direction that he assumes! Also, by that standard, every pegged currency is manipulated. Taken just a bit further, every fiat currency system is intentionally engaging in currency manipulation, at least indirectly.

(I'm not necessarily saying these complicated trade deals are perfectly fair. I suspect they aren't.)

Yeah, Trump is a genius! Mirek on what planet. By the way I know of no economist who talk about "Fair Trade" -- that's not what trade is about. As for the US not acting in its best interest, stop watch you bellybutton. Cause the rest of the world's "anti-trade" gang thing the exact same thing as you...

Re: "All things being equal, would the US be better off with a balanced trade account and balanced government budget?"

A balanced trade account would not necessarily make the US better off. Currently we have a deficit in the exchange of goods and services which is offset by a surplus in the capital account. Foreigner prefer to invest in the U.S. rather than buy our goods and services. Nothing wrong with that! Any attempts to change the balance of trade is prone to disrupting market equilibrium.

A balanced budget is preferable to a terribly unbalanced budget, to be sure. But the current size of the deficit (about 2 ½ % of GDP) is so small as to be almost unimportant. I believe it is to our advantage to always have a deficit of roughly 2% of GDP. Why? Because that would keep the supply of Treasuries from shrinking. A liquid Treasury market provides lots of stability to global financial markets. The value of that stability is probably close to the cost of servicing the debt.

I'm not sure that a balanced budget amendment would fix our budget problems. What if Congress decided to raise taxes in order to balance the budget at a time when the economy was weak (the deficit almost always goes up when the economy weakens)?

The best thing Congress could do is simply limit the growth of spending, while also reforming entitlement programs. Without entitlement reform, there is no hope of having a healthy economy in the long run.

I am wearing a $5 t-shirt from Walmart, one of those cheap imported items that "enrich" our lives. The shirt is scratchy and thin. I would much rather buy a thick, soft cotton made-in-USA t-shirt for $10 from a second-hand store, that sold for $20 or $30 new.

Ditto for pots, pans and other kitchen items made-in-the-USA that I get at the thrift store. These 30-year-old wares are better than the new Asian imports with potentially harmful impurities in the alloys and coatings (non-stick, etc).

I wince at the product-of-China food items filling the shelves of the Dollar Stores. The FDA can't adequately test the contents and packaging of all these imports. China-made pet foods have sickened and killed our pets repeatedly over the years (most recently, jerky chews were voluntarily pulled by stores). The only quality control in China is what a manufacturer thinks he can get away that week.

The goal of foreign trade should not be to maximize the efficiency of our economy, but to strengthen our citizenry. Our current trade policies undermine our citizenry. Food safety standards are weakened, we lose jobs and manufacturing know-how, and foreign "capital investment" is nice-talk to disguise that we're selling the store.

Sorry, I guess I'm missing your point, Mr. Grannis. There are no made-in-USA T-shirts at Walmart. None in the thrift stores, either. My choice is to buy a made-in-USA T-shirt online for $30 or do without. I can't afford $30 for a T-shirt. I don't see how I have a "choice" not to buy the cheap import.

I was trying to say that if our country had been mass producing good quality T-shirts for the past 30 years instead of being forced to retreat to a small specialty market by a flood of imports, I could buy my cheap T-shirt at the local thrift store, and it would be American made. I don't need imports to make it affordable. Also probably better quality used than the new imported one.

The US hasn't been producing cheap T-shirts for 30 years because foreign manufacturers have been able to produce them for less. You can buy good quality T-shirts made in the USA, but they cost more; no one has been able to produce them for less. If you can only afford $10 for a T-shirt, today you have no choice but to buy an import; only a free, open market and competition could improve on that result. Apparently no US manufacturer has been able to compete at that price point. No amount of regulation can improve upon that result.

I think free-traders should try an experiment. Take home several cans of product-of-China mandarin oranges. Ask your wife to serve them to the family over the summer. I bet she will refuse outright, or swap them for the Wholefoods brand, which are grown in Spain. My local organic grocer has stopped carrying frozen shrimp because it's all grown in unsafe aqua-farms in Asia. I bet your wives are already sheltering your families from much of the dark-side of free trade.

If we must continue with this free trade experiment, let's expand it to the financial and legal sectors. Allow foreign firms and governments to buy our trading exchanges and contribute to politicians so they can participate in regulatory capture and crony-capitalism. Automatically grant any foreigner who wants to be a floor-trader a green card. Prohibit any additional regulatory requirements (such as requiring a visa) on non-citizens holding brokerage accounts. As for law, create one national bar exam open to anybody, citizen or not, university graduate or not. If a candidate passes the exam, they are issued a green card and can practice in any state.

Since we've already cut off our nation's right arm (manufacturing), let's offer up it's heart (finance) and brain (law) to the knife of unregulated global commerce. Let the most efficient win.

There are times to instill certain measures, and times not...economist think things should be constant and not nimble,unfortunately with corporate offshore cash escapism, no wage growth, and not being competitive for core natural employment ...maybe a little insourcing and border closing makes sense...guys who don't make payroll, or hire people, marry globally and have most of their income in carry or cap gains can things like Scott and prefer to have formulas be certain..Scott, who I am a fan of, but long term, is not in touch here not.. Guys who need to make payroll, are combat vets, and generally distrustful of the media are starting a mild revolt ...

Scott Grannis said..."An economic truism: the country that benefits most from trade is the country that restricts it the least. Unfortunately, there are many, especially politicians, that don't understand this."

Call me a skeptic.

What constitutes a "truism" in economics? Is a truism the same as a tautaulogy or perhaps an a priori deduction? If not, perhaps it is a heuristic which economists have used so often that they have mistaken it for truth which they think works under all circumstances?

I love your helpful insights in your blog. Keep it up!I partly agree with your comments on Trump's trade policies, but as I have traveled to China and worked in manufacturing plants there, I feel it is worth noting:

1) China is not necessarily "better" at manufacturing than the US. They do have much more relaxed environmental practices and scores of cheap labor, with less worker protections, health care, and social security benefits than the US. The horribly polluted river behind the Chinese plant where I worked was a running joke. Beijing is terribly polluted and many rich and educated Chinese want to leave the country. I'm not sure that these are good, sustainable reasons for the US to give up on manufacturing and focus on finance or other fields.

2) The Chinese people would benefit from environmental and labor reforms. The Chinese government would also benefit, in the long run, by improving their environmental, education, and health care systems, thus stemming the exodus of rich and highly skilled Chinese.

3) A short-term profit maximization goal is not necessarily best for a society. This is what leads to worker and environmental abuses. Capitalism works, but it works best when company leaders have long-term sustainability and societal benefit in mind.

4) Trump is saying what he thinks will win an election, which arguably he knows more about than you or I. Let's pray that if he gets in office, he will rely on wise advisors to pick and choose the best ways forward.

Thanks again for your insights - you are educating us all!Best wishes,-SDH